In August last year, OUE LJ3 Commercial REIT TS0U ’s (OUE C-REIT) manager announced an asset enhancement initiative (AEI) for Crowne Plaza Changi Airport (CPCA) for $22 million. The return on investment (ROI) is estimated at around 10% based on OUE C-REIT's estimated capital expenditure of up to approximately $14 million. OUE C-REIT expects the AEI to be DPU-accretive.
At that time, OUE C-REIT’s manager viewed this was a better use of funds than acquisitions as interest rates were rising. In general, REIT managers viewed acquisitions cautiously because of a negative carry where the cost of debt was higher than property yields. Partly, the AEI transformed unused space into additional guest rooms.
With the AEI completed, CPCA has added 12 new rooms of which two are suites and 10 are premier pool rooms, taking inventory to 575 rooms. The pool rooms have a resort feel as they overlook a large swimming pool with water features. Together with the new suites, CPCA has 29 suites to cater for longer staying guests. The new suites have additional features such as washing machines. The new premier rooms are likely to command higher prices.
Although the current length of stay is around 1.5 days, CPCA, which is managed by IHG, aims to attract more guests to stay longer with the introduction of additional suites. Guests CPCA is aiming to attract include business travellers who plan to mix business with pleasure by bringing along their families.
In addition, as plans get underway for the construction of Changi Airport’s Terminal 5 in 2025, a project by Changi Airport Group, the Civil Aviation Authority of Singapore and the Ministry of Transport, CPCA is looking to put up project consultants in longer-stay accommodation. Other long-stay guests include out-of-town advisers at the Paya Lebar Airbase.
New meeting spaces including additional function room and meeting facilities have been added to cater to growing Mice demand. Completion of the AEIs is to help OUE C-REIT capitalise on the expected influx of tourists and business travellers in 2024 and beyond.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
In 1Q2024, Singapore should see a lot more activities than 1Q2023. This month, Cold Play will be coming to town for a performance. In February, in addition to the bi-annual Singapore Air Show in Changi, Ed Sheeran is slated to perform. Then in March, the year’s highlight will be Taylor Swift’s concert at the Indoor Stadium.
CPCA worked with Klook on a package with a hotel stay and tickets to the Taylor Swift concert and these were sold out within a few hours.
Although CPCA is not the only hotel near Changi Airport, its rooms have floor-to-ceiling windows, with ambient corridors and surroundings providing the hotel with a resort feel. This is in contrast to the transit hotels at the airport and Yotel at Jewel which have no windows or small windows and a lot smaller rooms. The transit hotels comprise Aerotel Airport Transit Hotel at Terminal 1, Ambassador Transit Hotel at Terminal 2 and JetQuay Sleeping Suite with a maximum of one guest per room.
See also: CICT's manager proposes to acquire ION Orchard at $1.85 billion, subject to EGM
Capital management
OUE C-REIT has focused on capital management and AEIs of its hospitality assets since the pandemic. In business updates for 3QFY2023 ended September 2023, Han Khim Siew, CEO of OUE C-REIT’s manager, said that the interest rate of OUE C-REIT’s $150 million 4.2% fixed rate notes due in 2027 had a stepdown to 3.95% from Nov 5, 2023. In addition, OUE C-REIT obtained a BBB– investment grade rating from Standard & Poor’s on Oct 30, 2023.
When the $150 million notes were issued in 2023, one of the conditions was a step down if OUE C-REIT obtained an investment grade rating by Moody’s, S&P or Fitch within 18 months of the issuance date.
Back in 2022, Han was able to obtain an unsecured $978 million sustainability-linked syndicated loan announced in August that year that took debt expiries past the worst interest rate hikes in 2022 and 2023. The next major maturity is an $889 million bank loan in 2025.
As at Sept 30, 2023, aggregate leverage stood at 39.4%, with an interest coverage ratio at 2.4 times which is well within regulatory limits as aggregate leverage remains well below 45%.
Hospitality to boost performance
On the hospitality front, in March 2020, OUE C-REIT announced the rebranding of Mandarin Singapore Orchard with an extensive AEI costing $90 million. Given that Covid disrupted travel in 2020 and 2021, the AEI was well-timed. In January 2023, OUE C-REIT announced that Hilton Singapore Orchard is operating the full inventory of 1,080 rooms and is well positioned to capture increasing demand from international business and leisure travellers as well as local Singapore residents.
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In 3QFY2023, Hilton Singapore Orchard accounted for 21.4% of OUE C-REIT’s asset value and 28.2% of revenue while CPCA accounted for 7.9% of valuation and 6.9% of revenue.
In 3QFY2023, OUE C-REIT announced that hospitality segment revenue for the third quarter was 67.6% higher y-o-y at $28.3 million while net property income (NPI) increased by 73.2% y-o-y to $27.0 million.
“The better performance was due to Hilton Singapore Orchard operating the total inventory of 1,080 rooms in 3QFY2023 compared to 634 rooms a year ago, as well as the ongoing recovery in the hospitality sector with visitor arrivals for the first nine months of the year increasing by three times y-o-y to 10.1 million,” OUE C-REIT said in its 3QFY2023 business update.
For 3QFY2023, the hospitality segment’s RevPAR or revenue per available room increased 12.8% y-o-y to $295. Hilton Singapore Orchard’s 3QFY2023 RevPAR was 3.8% higher y-o-y, at $345 while CPCA’s RevPAR increased 9.6% y-o-y to reach $199.
CPCA’s revenue is slated to improve this year following the completion of the AEIs as last year’s revenue was interrupted by the AEIs which took place from August onwards.
Back in 2019, before Covid, OUE C-REIT completed a merger with OUE Hospitality Trust. Part of the rationale was that size matters as fund managers rarely invested in REITs which had assets of less than $1 billion. Secondly, OUE HT had one major asset, Mandarin Orchard, which is now Hilton Singapore Orchard).
As a more diversified REIT, OUE C-REIT is viewed in some quarters as better able to weather different property cycles. During Covid, hospitality was affected to a much greater degree than office.
At any rate, the larger OUE C-REIT was able to recycle capital by divesting 50% of OUE Bayfront to a fund managed by Allianz Real Estate. Some of the sale proceeds were used for the AEI of Hilton Singapore Orchard for which ROI was also at around 10%.
More Grade A office comes onstream
OUE C-REIT’s largest assets are Singapore office properties, which account for 54.4% of valuation and contributed 48.2% to revenue in 3QFY2023.
The Singapore office sector held up in 2023 and outperformed its global peers with positive rental reversions and compressed capitalisation rates. The compressed cap rates despite two years of rising interest rates also imply that office REITs are unable to grow via acquisitions.
As at Sept 30, 2023, OUE C-REIT’s Singapore office portfolio’s committed occupancy remained at 95.7%. The average passing rent increased 1.3% q-o-q to $10.35 psf per month in September 2023 due to positive rental reversions achieved in past consecutive quarters. The manager achieved a positive rental reversion of 18.4% for office lease renewals in 3QFY2023, the statement adds.
However, concerns remain over shadow space and the slowing tech sector. According to CBRE, some shadow spaces were taken off the market as tech occupiers decided to retain their office premises. Thus, towards the end of 2023, CBRE observed shadow space, declining from the peak of 0.7 million sq ft in 1Q2023 to 0.17 million sq ft by 4Q2023.
Meantime, IOI’s Central Boulevard Towers has come onstream, adding to the supply. Tricia Song, CBRE head of research for Singapore and Southeast Asia, says: “The cautious sentiment likely to be observed in the first half of 2024 can also be attributed to a larger incoming supply, when we see an injection of about 2.9 million sq ft, notably from the delayed completion of IOI Central Boulevard Towers in Core CBD to Keppel South Central in the fringe CBD, and Labrador Tower and Paya Lebar Green in the decentralised locations. Rents may pick up more meaningfully in 2H2024 as the global economic recovery gains more traction.”
If supply in the CBD pressures rents, higher y-o-y revenues in 2024 from OUE C-REIT’s hospitality assets could offset its office sector’s performance.
OUE C-REIT’s unit price was negatively impacted in August and September 2023 as it was removed from the MSCI Small Cap Global Index along with Keppel Pacific Oak US REIT and Manulife US REIT on Aug 23, 2023. However, its unit price has recovered to pre-August 2023 levels. On the other hand, OUE C-REIT’s unit price is still well below its pre-Covid price of around 56 cents and NAV of 59 cents.
